The Growing Uncertainty in the International Tax System

Earlier today, the European Commission announced that it would require Ireland to collect roughly $14.5 billion in taxes from Apple, after determining that Ireland had granted Apple “illegal tax benefits” under the rules of the European Union. The decision has already ignited a fierce debate: Ireland, Apple, the U.S. Treasury, and many congressmen oppose the ruling, while advocates of higher corporate taxes have praised it.

Today’s decision is one in a string of recent European Commission rulings about the taxation of American businesses that operate in Europe. For instance, in October 2015, the EC required the Netherlands to collect as much as $33 million in taxes from Starbucks. Currently, the EC is investigating Luxembourg’s tax treatment of Amazon and McDonald’s.

Together, these rulings constitute a worrisome trend. Increasingly, multinational institutions, such as the European Commission, are acting as the final arbiters of the international tax system. As a result, U.S. companies may face growing uncertainty in determining their foreign tax liability.

The international tax system has never been simple or perfect (far from it), but it is often predictable. Businesses operating in more than one country can rely on a network of dozens of tax treaties that define which countries are entitled to tax a business’ income. Most developed countries rely on the same broad set of standards (“transfer pricing”) to determine where income is earned.

Under these treaties and standards, U.S. businesses can be somewhat certain about how much they will owe in taxes to which foreign countries. Without these set rules, multinational companies would be in a tricky position: if you’re a U.S. company, with factories in the U.K., patents registered in Japan, and sales in France and Germany, how would you even begin to determine where your profits were earned and who you should pay taxes to?

The business certainty afforded by the international tax system is important, because there is a large body of evidence suggesting that tax uncertainty is economically harmful. For instance, in 2004, Federal Reserve economist Kelly Deminston found that countries with more volatile tax rates tend to see lower overall investment. A more recent study found that businesses with greater tax uncertainty tended to delay investments for longer.

However, the recent decisions by the European Commission threaten to undermine the relative predictability of the international tax system. For instance, as the U.S. Treasury notes, the European Commission has adopted a different set of transfer pricing standards than those typically used by developed nations. The more sets of tax rules that businesses have to consider when making investment decisions, the less certain they will be about the total taxes they owe.

In addition, the Commission’s rulings have been retroactive, requiring countries to tax corporations on their business income from previous years. Retroactive tax policies increase the overall uncertainty of a tax system, by forcing companies to second-guess whether the tax rules they operate under are liable to be suddenly reversed.

Finally, the very fact that the European Commission has now established itself as a body with ad hoc authority over the tax payments of U.S. companies is likely to increase the uncertainty that these companies face. After all, the more cooks in the kitchen, the larger the mess; the more jurisdictions that can determine a business’s tax liability, the less predictable their tax payments will be.

None of this is intended to claim that the European Commission’s recent ruling was wrong. I am entirely unfamiliar with EU competition law and have little specific knowledge of Apple’s business finances. Instead, today’s news is another example of a troubling international tax trend, which should worry anyone who cares about preserving stable, predictable conditions for international business investment.

Help us achieve our vision of a world where the tax code doesn't stand in the way of success.

The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and local levels. We improve lives through tax policy research and education that leads to greater economic growth and opportunity.